22 BUSINESS
26 OCTOBER 2017
THE JEWISH WEEKLY
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Buy to Let investors: Are you aware of the imminent changes to mortgage underwriting? BY MARC OVITS
BA (HONS) APFS CERT PFS (DM)
Why Special Purpose Vehicles are in vogue for Buy-to-Let investors From 6th April 2017 the Treasury began phasing-in changes on Buyto-Let (BTL) investors, which will eventually mean they can only claim tax relief on finance costs - including mortgage interest - at the basic rate of 20%, rather than their marginal rate. This means that higher-rate and additional-rate taxpayers will pay considerably more tax, and has led to a massive increase in the use of Special Purpose Vehicles (SPVs) to buy BTL properties1. Why buy BTLs through a SPV? A SPV is usually a limited company, set up purely to hold property. Therefore corporation tax (at a rate of 19% since 6th April) is payable on the rental income - instead of 40% / 45% if it was assessed as personal income for a higher-rate / additional-rate taxpayer: Some 77% of BTL purchases are now being made via a corporate vehicle - such as a SPV - according to data from independent broker
Mortgages for Business1 in April. Setting-up a SPV can be done online for as little as £202, and buying a property through it is a similar process to buying it as an individual. Furthermore, customers have an increasing range of mortgages to choose from, as this type of arrangement becomes more popular. Any mortgage liabilities on BTL properties held within a SPV will be those of the SPV (i.e. a company). Therefore if you want to protect against the impact of a death or critical illness ‘business loan protection’ will be required. Considerations for protecting Buy-to-Let portfolios Inheritance tax (IHT) on SPVs An SPV is a company - so there’ll be Business Relief (BR) available after two years, and the shares in the company can be passed on completely free of IHT, right? Sadly not! That would be far too easy, and I’m afraid the taxman has thought of that. BR can’t be claimed if the business mainly deals with land or buildings, or if it only generates investment (rather than trading) income3. Clearly property letting is firmly caught within this net. Unless substantial other services are provided - e.g. those of a hotel - BR won’t be available, so there remains a need for IHT cover on those with an estate (including the net value of their BTL properties) in excess of the nilrate band. Even if the SPV is held outside
the UK, if it’s the equivalent of a UK close company (broadly meaning it is controlled by five or fewer persons), the shares will become liable to IHT once the Summer Finance Bill receives Royal Assent as expected later in the year. Critical illness cover The biggest issue I hear regarding providing cover on BTL investors is that of critical illness cover (CI). They need it but BTL property owners are usually older, and therefore traditional CI is often too expensive. Add into the mix that their children are likely to have flown the nest, and the children’s cover that is included by default with most CI contracts becomes pointless. A solution? Consider the more economical cover available through AIG’s Key3 Critical Illness Insurance: • It covers the conditions older people worry most about - cancer, heart attack & stroke • These three conditions accounted for 80% of AIG Life’s claims in 20154 • There is no children’s CI cover - you don’t pay for benefits they no longer need • Broadly, the discount available on Key3 gets wider the older the life assured Tenants – Generation Rent People assume that renters don’t need life insurance, because they’ll be single with no liabilities. However, tenants are no longer all in their 20s and single - which may have largely have been the case in decades past. We now have ‘Generation Rent’ - individuals who are struggling to get on the property ladder with property prices so high. They’re as likely to be in their 30s as in their 20s, and may have
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children. And this means that life insurance (and indeed family income benefit) may well be needed too. The Prudential Regulatory Authority’s new Buy-to-Let rules Are you aware of the new underwriting standards to be imposed on Buy-to-Let (BTL) mortgages from 30th September5 ? What are the new rules? The “minimum expectations”, as the Prudential Regulation Authority (PRA) refers to them, can be broadly summarised as follows: Affordability assessments should account for a borrower’s costs, verify their personal income, and suitably ‘stress-test’ against the effect of possible future interest rate increases. How would you could cope if you were to suffer a critical illness, or be unable to work due to long-term illness or injury? Your costs can be protected with life cover in the form of a Family Income Benefit plan, and your income income with Critical Illness Cover and/or Income Protection. Lending to ‘portfolio landlords’ - to be defined as those with four or more mortgaged BTL properties - should be assessed using a specialist underwriting process. What happens to the income if no one is alive or someone suffers a critical illness preventing them from being able to manage the properties ? Loans to small businesses - the provisions which reduce the capital requirements on loans to small businesses by around 25% should NOT be applied for BTL borrowing purposes. What happens if one of the company owners dies or suffers
The Writer is the owner and Managing Director of Alpha Wealth Management Limited. Drawing on over twenty years’ experience in financial services, Marc helps private clients, businesses, charities, and trusts optimize their finances. He is a Chartered Financial Planner providing ‘Independent’ financial advice. Prior to being a financial adviser, Marc was a Director at several global investment banks, providing investment advice to Europe’s leading institutional investment and pension fund managers. For advice on inheritance, investment, protection, or retirement planning, please contact Marc on 020 8203 6920 or 07866 503 898 or marc@alphawm.co.uk.
from a critical illness ? Is business protection required ? 1.www.mortgagesforbusiness. co.uk/news-insight/2017 2.www.telegraph.co.uk/finance/ personalfinance/investing/ buy-to-let 3 . h t t p s : / / w w w. g o v. u k / b u s i ness-relief-inheritance-tax/ what-qualifies-for-business-relief 4. Source of 80% stat (or have we got a 2016 stat now?) 5. Bank of England, 2016
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